Soft Landings and Other Collective Delusions

“If the names are not correct, if they do not match realities, language has no object. If language is without an object, action becomes impossible—and therefore, all human affairs disintegrate and their management becomes pointless.”

Confucious (translated by Simon Leys)

New York Review of Books

Last week featured some of the worst employment data seen in many months. The data not only suggests that the job market is really not growing, but it also suggests that many Americans are not even looking for work. As ZH noted before the Labor Day break:

“While the Establishment survey data was ugly due to both the miss and the prior downward revisions in the NFP print, the real action was in the Household survey, where we find that the number of people not in the labor force rose by a whopping 516,000 in one month, which in turn increased the total number of people outside the labor force to a record 90.5 million Americans.”

And yet mainstream economists continue to talk about economic growth and job creation as though it were really happening. In the quote above from Simon Leys, who is one of the great Sinologists of the past century, Confucious seeks to “make words correspond to reality.” But in the world of economics, herd behavior and shameless pandering to increasingly nervous employers and government officials is the order of the day.

Thus even as employment contracts and with it consumer spending, the economists tell us that the US economy is growing. Mark Grant at Southwest Securities put it nicely last week:

“Now if you believe that 90.50 million Americans are voluntarily outside of the workforce please allow me to introduce you to a good psychiatrist…. The 516m thousand people that ‘supposedly’ dropped out of the work force last month are doing what; heading to Mexico for a little sun and relaxation? This is fantasy and Never-Never Land and the stuff that broken dreams are made of because nightmares are likely on the way.”

The fact that a lot of smart people can somehow convince themselves that the economy is improving when the evidence says otherwise tells us a lot about the state of the American political economy. After decades of living beyond our means and justifying same with artful lies, we are descending into a sort of Orwellian malaise, where the rules of Newspeak are observed strictly but without thought. Just as liberals are better than conservatives at marketing their ideas to voters, the economists have evolved the pretense of knowledge about the economy into an art form. As George Orwell wrote:

"The purpose of Newspeak was not only to provide a medium of expression for the world-view and mental habits proper to the devotees of IngSoc, but to make all other modes of thought impossible. Its vocabulary was so constructed as to give exact and often very subtle expression to every meaning that a Party member could properly wish to express, while excluding all other meaning and also the possibility of arriving at them by indirect methods. This was done partly by the invention of new words, but chiefly by eliminating undesirable words and stripping such words as remained of unorthodox meanings, and so far as possible of all secondary meaning whatever."

The collective delusion by the economist profession (or at least those who profess to be economists) is resulting in a swelling of opinion to the effect that the Federal Open Market Committee is getting ready to stop its extraordinary purchases of government debt and mortgage securities. The economists tell us that because the economy is getting better, the Fed will stop monetizing hundreds of billions of dollars in debt annually. The assumption, of course, is that the Fed’s actions are actually helping the economy, when it fact the central bank’s policy of zero rates and “quantitative easing” have only helped debtors at the expense of everyone else.

Another area where Newspeak is applied to economics is the Affordable Care Act put in place by President Obama. Employers around the US have been shedding workers and changing their health care programs in order to minimize the damage from ACA. The labor force participation rate is now 62.3%, a 35-year low. Yet somehow the members of the economist profession, who by and large support socialized health care, view the impending implementation of ACA as a good thing. Mortgage industry observer Rob Chisman notes:

“Starting January 1 UPS will no longer offer health benefits to working spouses of its employees who are eligible for insurance with their own employer. UPS, the 4th largest employer in the nation, said its healthcare costs are expected to rise 60% (to 11.25% in 2014 vs. the usual 7.00%) as the full impact of the Affordable Care Act is felt.”

Keep in mind that the largest banks and the mortgage industry more generally has been shedding staff for the past several months, this in reaction to the sharp decline in mortgage origination volumes. The housing sector is in a free fall in terms of lending volumes, but nobody in the economist profession seems to take notice. The balances of 1-4 family mortgages held by banks in Q2 2013 actually fell, as did loans sold into securitizations. As I wrote in Washington & Wall Street last week:

“With the volume of mortgage refinance transactions falling and new home purchases growing at far lower rates, the sharp drop in total mortgage lending volume predicted by the MBA comes into sharper focus. As we’ve noted in this column before, the MBA expects total mortgage lending in the US to go from $1.6 trillion this year to just $1.1 trillion in 2014, a 31% decrease.”

Now not everyone agrees with the gloomy MBA projections, including my happy pals at CoreLogic and Paul Miller at FBR. Miller writes this morning:

“We still believe that our origination estimates of $1.6 trillion in FY13 and $1.4 trillion in FY14 are attainable, especially as purchase volumes return to normalized levels, the remaining higher-coupon mortgages refinance, and the government continues to support housing market recovery.”

The trouble, of course, is that purchase volumes are returning to “normal” levels and these numbers are well-below the run rate seen during the last credit boom and bust. While lending volumes at some of the smaller, non-bank players are holding very nicely, the volumes at the larger banks are falling rapidly. The prediction made by JPMorgan of a 40% drop in loan origination volumes in 2H 2013 should still resonate, but in the world of Newspeak we are not allowed to express negative thoughts.

At a dinner with some of my fishing buddies this past week, we went around the table and talked about our chief worry bead, the outlier in our badly clouded perception of reality that makes us pace the floor. For me the worry is that markets and our beloved economists are so confused by the anomaly created by the FOMC that we no longer know which way is up.

Part of the confusion is due to the Fed’s extraordinary policies, part from our own self-delusion. In his NYRB profile of Simon Leys, Ian Buruma wrote that “The truth can be brutal, and makes life uncomfortable. So one looks the other way.” Leys himself noted with respect to the West’s ability to put aside inconvenient facts such as the 1989 Tiananmen Massacre: “What people believe is essentially what they wish to believe. They cultivate illusions out of idealism—and also out of cynicism.”

By Q4 2013, when the deceleration of volumes in the housing sector, falling credit balances at banks and increasing unemployment start to weigh on the financial markets, we will reach an epiphany, an inflection point where the delusion of Newspeak will be pushed aside and the reality of unemployment and deflation comes roaring back into our collective unconsciousness. The convenient delusion that the FOMC is actually in control of the US economy evaporate, bonds and stocks will backup in perfect correlation. And nothing that the FOMC does from that point on will have any effect on the outcome.